Real estate investing is a popular way for portfolio diversification and generating passive income. As a beginner in real estate investing, you have the potential to get into real estate, become a successful investor, and achieve your financial goals. But you would first need to start somewhere.
This in-depth beginner’s guide to real estate investing aims to teach you everything you need to know to get started in the real estate market and build the right path for you.
- The benefits of real estate investing may include rental income and property value appreciation.
- The median asking rent for vacant rental units was $1,322 in the fourth quarter of 2022.
- Some investors prefer real estate due to its relative stability and opportunity for part-time or full-time involvement.
- Real estate investing can be expensive, but there are also options for small investments, such as REITs.
- Popular real estate investment strategies include flipping and the Buy, Rehab, Rent, Refinance, Repeat (BRRRR) method.
- Funding real estate investing typically involves personal savings, mortgages, credit cards, home equity loans, or other options.
Is real estate investing a good idea?
Investing in real estate offers several potential benefits for investors, depending on market conditions. Here are a few reasons why investing in real estate can be a good decision:
- Real estate investing can hedge against inflation: It's a popular strategy to keep up with inflation because home prices and rental income tend to rise right along with inflation.
- Real estate can diversify your investment portfolio: It may help reduce portfolio volatility as home prices tend to fluctuate less than other asset classes, such as stocks.
- Real estate may provide semi-stable asset appreciation: The value of real estate assets may increase over time, and while it can vary over time, it is often viewed as a steady long-term investment that may provide growth. However, keep in mind that past performance doesn't guarantee future returns.
People may also prefer real estate investing for psychological and emotional reasons, such as:
- Real estate provides a tangible investment: Investing in properties and building a real estate career can give you a hands-on experience in property management and rehabilitation while figuring out how to invest in stocks means looking at charts, reports, and other less tangible information.
- Real estate investing can be done on a part-time or full-time basis: Some people use rental properties as a secondary source of income, while others invest in real estate full-time by acquiring new properties or improving existing ones.
- Real estate investing can be accessible: While it used to be expensive, modern investment options enable people to enter the market with limited funds. Investment options such as real estate investment trusts (REITs) allow individuals to invest in real estate through companies that own and operate properties.
That’s why real estate investing could be easy to get into and may present a good investment idea.
RememberAll investments come with risk. This guide is not intended as investment advice — be sure to do your own research before investing.
How to invest in real estate (even if you're a beginner)
Real estate investing encompasses a range of options with varying time and financial commitments as well as pros and cons. Let’s look at some of the methods of real estate investing for beginners to determine which path you’d like to take.
Flipping houses is the art of buying a property for a below-market price and selling it for a higher price after making improvements. This often involves purchasing distressed properties, which are in need of repairs, and fixing them up to increase their value. The upgrades can be minor, such as installing new carpet, or more extensive, such as replacing a roof.
You can make money flipping homes by understanding the future value of a property after all the repairs have been made. The new expected value after you've completed all your renovations and upgrades is what’s known as the after-repair value or ARV.
Your profit is the new sales price minus your selling costs, purchase price, repair costs, and carrying costs, such as utilities, insurance, and HOA fees. A general rule when learning how to invest money is to do some math before you commit to an investment.
One downside of this option is that your invested money in a property may be illiquid for some time, depending on whether you keep the property for a short term or a longer period.
Learn moreWant to get more information about house flipping? Take These 9 Simple Steps to Start Flipping Houses
Use the Buy, Rehab, Rent, Refinance, Repeat (BRRRR) method
The BRRRR method in real estate investing focuses on purchasing undervalued rental properties that can be improved to increase their market value. Investors look for properties that are being sold at a discount compared to their neighbors, for example, a home that is selling for $120,000 due to a quick sale from a divorce proceeding while neighboring homes are worth $150,000 to $200,000.
Learn more in our step-by-step guide to getting started with the BRRRR method.
Once the property is upgraded, the investor lists it for rent, and after finding a tenant, they can refinance the property based on its increased market value. This can then be used as a form of house hacking to put money down on another property and start the BRRRR process over again with another property.
Using the BRRRR method, you may make money from the increase in the property value after rehabilitation, rental income, and the potential growth in property value over time. This all can contribute to the flow of money you have available and the overall net worth of your investments.
However, keep in mind that the real estate and housing markets also go through periods of depreciation that can impact you and negatively affect your return on investment.
Get into wholesaling
Wholesale real estate means acting as a middleman between a seller and a buyer to make a profit. Unlike real estate agents, wholesalers don't need a license as they technically own the property they sell.
Learn how to get started in wholesale real estate.
Real estate wholesaling often falls into one of the following categories:
- Land wholesaling: Involves undeveloped land that often has no structures built on it. It could be cheap for the investor to purchase and maintain land because of tax benefits such as low property taxes when there are no structures.
- Residential wholesaling: Focuses on single-family homes, condos, townhomes, or multi-family homes and often involves signing a purchase contract with the seller and finding a buyer who would buy the contract for a fee.
- Commercial wholesaling: Involves selling commercial buildings, strip malls, apartment buildings, office buildings, and more. Commercial wholesaling follows a similar same path to residential wholesaling.
Invest in REITs and real estate funds
A real estate investment trust (REIT) is a company that owns, operates, or finances real estate that produces passive income. You can start investing by buying shares in publicly-traded REITs or real estate funds, such as mutual funds and exchange-traded funds (ETFs) without needing a lot of money.
REITs can specialize in various types of real estate investments, such as healthcare facilities, commercial buildings, or apartments. The main advantage of REITs is that individual investors can start with a little money and gradually add more. Depending on the REIT or the fund you use, it may also be regulated by the U.S. Securities and Exchange Commission (SEC), which can help protect you from fraud.
Find out more about REIT investing.
Use real estate crowdfunding
Real estate crowdfunding platforms offer somewhat similar investment opportunities to REITs. These platforms allow individual investors to pool their money together and invest in real estate projects, such as commercial buildings and rental properties.
Examples of real estate platforms include:
- DiversyFund: With a low minimum investment requirement of only $500, DiversyFund enables you to participate in its crowdfunded REITs and invest in multi-family commercial properties without being an accredited investor.
- CrowdStreet: If you're an accredited investor, this real estate crowdfunding platform can pool your money with other people's money for commercial real estate investment opportunities. CrowdStreet offers diversified investment options with minimum investments of about $25,000.
- Fundrise: It's a real estate investment platform that allows you to invest in commercial and residential properties through two products it calls eREITs and eFunds. The minimum investment is $10, and the platform doesn't require you to become an accredited investor.
- Ark7: This online platform for real estate investing enables you to buy shares of rental properties without needing a physical property visit or in-person renter management. You can get started with as little as $20 without needing to be an accredited investor. However, some properties do require accreditation.
How to fund real estate investing
One of the initial steps new investors in real estate need is to build pools of available money to purchase properties. Unless you have an established real estate business or experience in real estate, getting a bank loan to buy properties may be a challenge.
Depending on the type of investing you want to do, the properties you are targeting, and your financial situation, different funding sources may be available to you. For example, funding for flipping houses may be different than funding for other types of investment properties.
Your personal funds could be the cheapest source of financing available. Having money set aside to pay for your real estate deals allows you to act quickly with no interest charges. For example, wholesalers may only need a small pool of money to pay for the deposits to get real estate properties under contract.
Explore the best savings accounts.
Conventional loans and government programs
As you begin with real estate investment, you may purchase a property to use as your primary residence while you work on improvements or wait for it to increase in value. If you plan to reside in the property, conventional mortgages and government programs may provide funding options.
- Conventional mortgages: This type of loan can be obtained from either a credit union or a bank. Credit unions often offer lower interest rates and fees due to their non-profit status and have more flexible loan approval processes as they serve specific communities.
- Government programs: Loans from the Federal Housing Administration (FHA), Veterans Affairs (VA), and the U.S. Department of Housing and Urban Development (HUD) come with varying eligibility criteria. For example, FHA loans require a down payment as small as 3.5%.
Remember that when your down payment is less than 20% of the home value, you need to pay a mortgage insurance premium (MIP) that protects the bank if you default on the loan. This increases your total mortgage payment, so make sure to use a mortgage calculator to know what to expect when planning your real estate investment.
Financing secured through a mortgage broker
Another option is to work with a mortgage broker. Mortgage brokers have the ability to shop your mortgage around to various lenders to find you the best deal. Online websites, like Rocket Mortgage, may also provide this service.
Find out the services it offers in our Rocket Mortgage review.
Mortgage brokerages charge a fee for their service that will need to get paid by the borrower or the lender. A typical fee ranges from 1% to 2% of the loan amount and must be disclosed in your loan documents. If you’re paying these fees, they can typically be paid upfront at closing or added to your loan balance.
Home equity loan or line of credit
Existing property owners also have the option to tap into their home equity to fund their investment property purchases in the form of a home equity line of credit (HELOC) or home equity loan. It is generally more flexible and economical to use a home equity line of credit instead of a home equity loan.
Learn the difference between HELOC versus home equity loans.
Personal loans and lines of credit
Personal loans and lines of credit are unsecured financing options that are not tied to the property you are purchasing. Having this cash flow available versus a traditional mortgage allows you to act quickly without waiting for an appraisal or underwriting approval once you find a property.
Personal loans are installment loans that charge interest and require set monthly payments. With a personal line of credit, you only have to pay interest and make payments if you’ve withdrawn money from that account.
Find out the best personal loans.
Seller or owner financing is when you buy a property and make payments to the owner instead of the bank. This method is very advantageous if you are unable to get approved for bank financing. The interest rate may be higher than a traditional bank loan, and the size of the required down payment can vary, but you also won’t have to pay many of the normal fees a bank may charge.
Credit cards are a great way to pay for repairs, utilities, insurance, and other expenses. Depending on your credit score and the cards you may qualify for, you may be able to earn rewards on these purchases or get a 0% APR promotional offer to give yourself more time to pay off the balance.
Learn which credit cards could be the best 0% APR cards.
Hard money loans
Hard money lending can be more expensive than other forms of financing, but hard money lenders may also be more likely to approve you. Most hard money lenders charge two-to-four points (one point is 1% of the loan amount) to issue you your loan. Typically, they will offer interest rates of 8% to 14%, which is generally more than you’ll pay with other funding options.
Hard money loans are usually not for long-term financing and often come due in full within a year. Hard money loans are usually a last resort due to the onerous terms, rates, and fees associated with this type of loan.
How to find your first property
The age-old saying in real estate is location, location, location. Where your property is located is important, but so are other factors if you want your investments to be profitable. There are several avenues available to find your real estate investments. The most successful real estate investors use multiple sources simultaneously to find the best deals.
Real estate agents and the MLS
You could work with a realtor or a real estate agent to gain access to their local knowledge and the multiple listing service (MLS). The MLS is a database of properties for sale that only licensed real estate agents have access to. Online websites such as Redfin, Zillow, and others seek to mimic the MLS, but they do not have as much data.
Auctions are another option for finding potential deals. In many cases, properties might be for sale at auction because they are not in optimal condition for sale through the MLS. There are different types of auctions, including tax lien auctions, trust auctions, government auctions, and foreclosure auctions.
Auctions usually require that you put down a deposit in order to bid and you must also have the ability to pay for your winning bid shortly after the auction closes. In other words, if you need bank financing, an auction may not be the way to go.
Investors need to perform extra due diligence on an auction property to ensure that there are no hidden liens against the property. And, in many cases, you might not have access to the property before making your bids. Sales are usually final, so you cannot back out if you find problems later on. The risks are high with auction properties, but so is the potential for profit.
Wholesalers are always looking for prospective buyers, so they represent a great way for you to find your investment property. When speaking with a wholesaler, explain what specific types of real estate developments or properties you are looking for so they can share opportunities that meet your criteria.
Best real estate investing credit cards
Using credit cards for real estate investment could be a valuable strategy. Credit cards help you build a solid credit history that may help with future loan approvals. Credit cards may also provide valuable cash back and rewards on your expenses for rehab, utilities, insurance, and more. Finally, 0% APR promotions help with low-cost financing for your real estate deals and expenses.
Here are a few of our favorite credit cards for real estate investing:
|Credit card||Annual fee||Welcome bonus||Earning power||Intro APR|
|Ink Business Cash® Credit Card||$0||Earn $750 bonus cash back after you spend $6,000 on purchases in the first 3 months from account opening||5% cash back on the first $25,000 spent in combined purchases at office supply stores and on internet, cable and phone services each account anniversary year; 2% cash back on the first $25,000 spent in combined purchases at gas stations and restaurants each account anniversary year; and 1% cash back on all other card purchases||0% intro APR for 12 months on purchases (then 17.74% - 23.74% Variable)|
|Ink Business Preferred® Credit Card||$95||Earn 100k bonus points after you spend $15,000 on purchases in the first 3 months from account opening||3X points on the first $150,000 spent in combined purchases on travel, shipping purchases, Internet, cable and phone services, advertising purchases made with social media sites and search engines each account anniversary year; and 1X points per $1 on all other purchases||None|
|Ink Business Unlimited® Credit Card||$0||Earn $750 bonus cash back after you spend $6,000 on purchases in the first 3 months from account opening||1.5% cash back||0% intro APR for 12 months on purchases, then 17.74% - 23.74% Variable|
|The Blue Business® Plus Credit Card from American Express||$0 (terms apply)||Earn 15,000 Membership Rewards points after spending $3,000 on purchases in the first 3 months||Up to 2X points||0% intro APR for 12 months on purchases, then 17.99% - 25.99% (variable)|
|Citi® Double Cash Card||$0||Balance Transfer Only Offer: 0% intro APR on Balance Transfers for 18 months. After that, the variable APR will be 18.49% - 28.49%, based on your creditworthiness||2% on every purchase with unlimited 1% cash back when you buy, plus an additional 1% as you pay for those purchases||0% intro APR for 18 months on balance transfers, then 18.49% - 28.49% (variable)|
Ink Business Cash® Credit Card
New cardholders of the Ink Business Cash® Credit Card can earn $750 bonus cash back after you spend $6,000 on purchases in the first 3 months from account opening. This card earns 5% cash back on the first $25,000 spent in combined purchases at office supply stores and on internet, cable and phone services each account anniversary year; 2% cash back on the first $25,000 spent in combined purchases at gas stations and restaurants each account anniversary year; and 1% cash back on all other card purchases. This is a great card if you’re after cashback potential.
Ink Business Preferred® Credit Card
You can earn 100k bonus points after you spend $15,000 on purchases in the first 3 months from account opening of opening the Ink Business Preferred® Credit Card. These points are worth up to $1,000 cash back or $1,250 toward travel when used to book travel on the Chase travel portal. This card earns 3X points on the first $150,000 spent in combined purchases on travel, shipping purchases, Internet, cable and phone services, advertising purchases made with social media sites and search engines each account anniversary year; and 1X points per $1 on all other purchases.
Ink Business Unlimited® Credit Card
Ink Business Unlimited® Credit Card cardholders earn an unlimited 1.5% cash back on all spending. You can earn $750 bonus cash back after you spend $6,000 on purchases in the first 3 months from account opening. You may also benefit from a 0% intro APR on purchases for 12 months (then 17.74% - 23.74% Variable APR) to get extra time to pay for your purchases.
The Blue Business® Plus Credit Card from American Express
This The Blue Business® Plus Credit Card from American Express is great for everyday purchases because you'll earn 2X Membership Rewards points on everyday eligible business purchases up to $50,000 each year, and 1X points on eligible purchases after that. It also offers a 0% intro APR for 12 months on purchases, then 17.99% - 25.99% (variable) APR after that.
Citi® Double Cash Card
While the other credit cards on this list are some of the best business credit cards, the Citi® Double Cash Card is a personal credit card. Cardholders receive up to 2% cash back on every purchase with no limits on the amount of cash back you can earn. You can also transfer balances to take advantage of the 0% intro APR offer for 18 months (then 18.49% - 28.49% (variable) APR).
Success storyOur resident award travel and real estate expert Brandon Neth combined his two passions. Here’s how he used credit points to buy a multi-family investment property.
We chose a variety of credit cards that enable you to earn flexible cashback benefits along with generous welcome bonuses. We primarily chose business credit cards that offer 0% intro APR periods to help you finance your expenses. We also included a non-0% intro APR card and a personal credit card to demonstrate how you can maximize your real estate expenditures.
Credit cards that come with 0% intro APR offers enable you to make large purchases and pay them over the intro APR period without carrying a high interest cost on your balance. Keep in mind that we didn't review every available credit card option, and the cards listed here may not fit every situation. This list is meant to serve as a starting point to help you find the right card for your real estate investment needs.
FAQs about getting started in real estate investing
Is investing in real estate a good idea?
Investing in real estate can have its pros and cons, and deciding whether it's a good idea is mainly up to you. When you invest in a property, you may benefit from its value appreciation over time, potential cash flow from renters, and certain tax benefits, including specific property-related deductions. However, buying a property may require a lot of money, and in certain markets, it can be difficult to locate attractive homes. You may also need to deal with potential problems and repairs a property may require. Keep in mind that some forms of real estate investments help you avoid these issues, such as real estate investment trusts (REITs) and crowdfunding platforms.
How can I invest in real estate with a little money?
You can invest in real estate, even if you only have a little bit of money. Platforms such as Fundrise and DiversyFund allow investors to join the real estate market for as little as $10 and $500, respectively. Another way to invest in real estate with little money is by using REITs and real estate exchange-traded funds (ETFs). You may also seek financing when buying a property or form partnerships with people you trust to pool enough money together.
How to invest in real estate as a beginner?
There are various methods to invest in real estate as a beginner. These methods include:
- Flipping houses: This method involves buying homes that need repairs or renovations, performing the needed work, then selling them for higher prices.
- Using the BRRRR method: The buy, rehab, rent, refinance, repeat method is an upgraded version of flipping houses where you use the properties and profits you make to invest in even more properties.
- Investing in REITs and real estate funds: These are investment vehicles that allow you to enter the real estate market without having to buy actual property. Instead, you become a partial owner of a property by investing in the trust or fund that owns it.
- Getting into wholesaling: This is a form of trade where you act as the middle person between a buyer and a seller, allowing you to make a profit in the process.
Real estate investing: Bottom line
Education is a good thing, but don't fall into paralysis through analysis by reading endless real estate listings. The perfect deal rarely happens, and if you wait for the perfect deal, then you may be waiting for years to make your start in real estate investing.
Here's a quick checklist to get you started on your first real estate investment:
- Decide whether you want to be a flipper, buy rentals, or do wholesale deals.
- Determine which type of properties you want to focus on. For example, you could invest in land, residential real estate, or commercial real estate.
- Figure out the location you want to invest in. Remember, you don't have to invest in the same place you live.
- Create your investment strategy and network to find potential properties.
- Set up a plan for how you fund your investments.
- Set a timeline for when you want to complete your first deal.
- Think about the outcome that would make you happy with your first real estate investment.
The best way to get started is to learn a little and execute, then learn some more and make your next move. And don't be afraid to ask for advice along the way. If you’ve got questions, come join us in our BiggerPockets Fans - Real Estate and Investors Facebook group. Your friends in the FinanceBuzz community are always here for you and happy to help you make a successful start and build wealth over time!
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